The Down Payment: Don’t Give It

Over the past couple of years, I’ve watched (and listened to) parents who have, with the best of intentions, given their children part or all of the down payment necessary to purchase a single family residence.

With very few exceptions, it has not turned out well. In some cases, after acquiring the home, the children experience difficult economic circumstances such as job loss, medical emergencies, or simply not being prepared for all of the extra expenses (maintenance, property taxes, insurance, etc.) that come with owning a residence.

Because they have not, usually as a married couple, jointly decided to work, save, and sacrifice in order to accumulate the money needed for a down payment, they find it less difficult to walk away from the responsibilities of a monthly mortgage. The parents often times are left holding the bag, financially speaking, and dealing with a large amount of resentment.

Parents need to know this: their child may think they want something and even know they want something. But until they are willing to work for something there’s no assurance that, first, they really want it, and second, that they’ll work to protect and preserve it once they get it.

The dream of home ownership that so many of us are sold is very different than the mortgage payment that comes tapping at your checking account every month. It doesn’t care if you’ve had car repairs, a leaky toilet that ruined the hardwood floors, or a sick child. Payment is required.

That’s challenging enough for couples who have mutually decided they want a home and have planned and saved for the down payment and have made the commitment to ownership.  If the bulk of your equity is in the form of a down payment that you did not work and sweat for, it’s just too easy to walk away when times get tough. I’ve seen it happen, time and time again.

If you’re a parent and there’s a hundred thousand or more just burning a hole in your pocket, don’t give your child the down payment for a single family home. If they’re married or engaged to be married, set up a trust fund for your future grandchildren. Have it provide for their education. By that I don’t just mean college. I mean quality private schools from first grade through high school, if necessary. And college. And post graduate work. And the opportunity to study abroad. Better make that a cool half mil.

This may sound harsh, but skip your children. They’re adults now. They need to make their own way. (Unless they’re a writer, then, you know, God help you.) Invest in your grandchildren. Give them the huge advantage of a quality education.

It will make you feel good. You’ve contributed to the family’s well-being. It may free your children from worry and financial stress: they don’t have to plan for the expense of college for their children. They can start a business or continue their own education or pay off their own student loans. They can save more. They can pursue what they really love, even if it pays less.

It will definitely give you the chance, while you’re still with us, old sport, to impact your family’s future twenty, thirty or forty years down the road.  The thinking and hope is this: whatever life throws at your children, your grandchildren will, in all likelihood, be alright. They’ll still have the opportunities that education affords. This kind of thinking and planning is common among Old Money families and those who aspire to join the club.

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If there are no grandchildren on the horizon and your child wants a home, then go in as partners on an income property. You contribute the down payment. Let them live in one unit of a two or four-unit apartment building. Let them manage the day-to-day operations of the place and pay whatever part of the mortgage the rental income doesn’t cover. Let them pay the insurance and property taxes. Let them be the repairman and the landlord (or lady).

Let them get a taste of property ownership. If they can handle it, great. They can reside there and take care of it for as long as they like. If they don’t like it, or can’t make the mortgage payments, they can pay you rent, or move out into another place.

And if they think, after this experience of property ownership, that they want to own their own home, they can save their money, find their new place, and put the down payment on it themselves. (Whatever happens, you still have an asset that will hold its value and produce a predictable cash flow every month, as well as provide some tax benefits.)

I can assure you: your children will be much less likely to simply walk away when times get tough. They’ll be much prouder of their accomplishment, more than they would be grateful to you for giving them the down payment. And they’ll be much better stewards, when the time comes, to handle whatever inheritance you leave them.

Let them earn it.

  • BGT

12 thoughts on “The Down Payment: Don’t Give It

  1. You make excellent points Byron (as always) and I agree with everything said. Maybe I am just a pessimist but I have always believed the real motivation for parents “helping the youngsters out” is control. Even if the parents are not conscious of this motivation, it can’t be denied that the kids “owe them” for the help they have provided. Whether it is going with mom’s pick on the color of the drapes or letting dad make your financial decisions, the young couple will not have the same autonomy as those who have done things for themselves.

    It is the harder way to go but the payoff is that you get to be your own man (or woman) and could even become a Surprise Millionaire if you play your cards right. 🙂

    Keith

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    1. I agree with you that there is a motivation for control when giving money to the kids. We accepted a small amount of money to help with the down payment from my inlaws. MIL already expected to have input in our lives anyway, and this made it worse. Looking back I wish we hadn’t taken the money.

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  2. Don’t “give” to children OR grandchildren. When children are infants (and don’t have more children than you can do this for) they should be told frequently until they graduate from high school: when you graduate from high school we will have $50,000 set aside for your college education or to start your own business; however, to have access to that money you must have personally raised $10,000 by the end of high school in order to have the money for college, or you must have personally raised $15,000 by the end of high school in order to have the money to start a business. Then children should be given–not an allowance–a certain amount of money for each task they do around the house from the age of four, and should also be shown at that age how to open a checking account, how to save, and how to invest. By age seven each child should be looking for work outside the house, whether delivering papers, mowing lawns, working from the bottom up in the family business, etc. Children should be shown how to achieve financial independence by the time they are in their 30’s. Children should be encouraged to think about how to create jobs for themselves and possibly their siblings and friends. Children should also be encouraged to think about what kind of work they would love to do for all their lives, even after, and especially after, they achieve financial independence.

    It should be made very clear to the child repeatedly from birth that other than the $50,000 on high school graduation, parents will always and only be there for advise and guidance on how to handle finances and life as an adult. Oh, yes, and also the parents should give and read with the child a copy of “The Old Money Guide to Marriage”. Parents should have already agreed by the time they marry that they themselves will have achieved financial independence by the time they are in their 30’s, and will be an example for their children. This can and should be achieved no matter how much or how little money a couple starts out with.

    Buying a house to live in can be part of the family’s assets, but should never, ever be a family’s primary investment. Old Money knows this…

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  3. Setting up a fund for the grandchildren’s education is a truly excellent idea. If you’ve already put your own children through school and they’re working with careers of their own, they’ll be fine. After you’ve given your children a good start in life, it’s important for them to make their own way in the world. If you can afford it, now is the time to ensure that your grandchildren get a good education too. Making sure that their tuition will be paid is one of the best things you can do for them and one of the best uses of your money. A good education is invaluable, and if you can see to it that their tuition is covered, you’ve given your grandchildren a better gift than all the money in the world.

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  4. Great thoughts. The climate of parenting seems to have changed in the last decade. My husband and I know parents who are going into deep debt to pay for their child’s college education, to buy them cars, basically – fund their lives. And the children just keep expecting more and more. These parents have done no pre-planning, but at this stage of their lives – 50’s – they’re going into a mortgage-worth of debt, in addition to still having a mortgage. We are childfree and this behavior seems extremely foolish.

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  5. I am currently reading your book, and wondered what percentage of net worth a primary residence would reasonably consume? My own thoughts were that it should probably not be more than 20% (exceptions being made if it is also income generating, or perhaps depending whether renting vs owning is more cost effective in a given area at a given time).

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    1. Hi Andrew, I hope you enjoy the book. I would say there are a few factors that make it difficult to assign a percentage of net worth to a primary residence: how much money do you have in cash and liquid investments? how much income do you have? is your job or profession secure? are you married? expecting children? why do you want to own a home in the first place?

      If you lost your income completely, could you live for a year or two on your investments and savings without much worry? Then you might be in a position to purchase a modest home. It’s the down payment and the mortgage payments, of course, but it’s also the maintenance and taxes that catch most people off guard.

      Think long and hard before buying a single family home. Then spend much less on it than you think you can afford. That’s the best advice I can give.

      Other readers may contribute their thoughts…Amy? Michael? Keith? Any thoughts on this?

      Thank you again, Andrew. – BGT

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